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Internship Report
On
―THE ROLE OF ISLAMIC BANKING PRACTICE ON SMES
DEVELOPMENT IN MOGADISHU”
Submitted to
Prof. Dr. Mostafa Kamal
Faculty of Business and Economics
Daffodil International University
Submitted by
Adam Ahmed Mohamed
ID: 181-14-2711
Program: MBA
Major: Finance
Department of Business Administration
Submission Date:
th
21 December 2018
©Daffodil International University

LETTER OF TRANSMITTAL
Date: 21st December 2018
To: Dr. Mostafa Kamal
Professor
Department of Business Administration and
Department of Real Estate
Subject: - Submission of internship report
Dear Sir,
With due respect, I‘m glad to summit my internship report entitled ―the role of Islamic banking
practice on SMES development in Mogadishu‖ as a partial fulfillment of Master of Business
Administration. It is an immense pleasure to complete this thesis within due time under your
guidance and supervision. While conducting this research all instructions and guidelines were
duly followed.
A sincere time was spent and all necessary effort was made to complete this research in a
feasible and realistic way, with hope that this thesis will meet all the requirements and
expectations.
Thank you
Yours Sincerely,
………………………….
Adam Ahmed Mohamed
ID No: 181-14-2711
MBA Program (Finance)

ii
LETTER OF AUTHORIZATION
I hereby declare that this submission is my own work in completion of the program of Master of
Business Administration, major in Finance, and that to the best of my knowledge, it‘s my work
and it contains no material previously published by another person nor it has been accepted for
the award of any other degree of the university, except where due acknowledgement has been
made in the text.
Adam Ahmed Mohamed

ID: 181 – 14 – 2711
Signature ……….…..………
Date ………….…….……….…

iii
LETTER OF ACCEPTANCE
I am very much pleased to certify that internship report entitled ―the role of Islamic banking
practice on SMES development in Mogadishu” prepared by Adam Ahmed Mohamed ID No:
181-14-2711, Department of Business Administration, Faculty of Business and Economics
Daffodil International University under my supervision. The data and findings presented in this
thesis paper seem to be authentic. Thus, the internship report has been approved for presentation.
I wish him every success in life.
……………………………………………………………
Date…………………………………………………………….
Dr. Mostafa Kamal
Professor, Department of Business Administration and
Advisor, Department of Real Estate

iv
ACKNOWLEDGEMENT
In the name of Allah, the Most Gracious and the Most Merciful Alhamdulillah, all praises be to
the almighty Allah who enabled me to successfully complete my project paper. Special
appreciation and gratitude goes to my beloved supervisor, Dr. Mustafa kamal, for the continuous
support of my Masters Study and research, for his patience, motivation, enthusiasm, and
immense knowledge. His guidance helped me in all the time of research and writing of this
thesis. I could not have imagined having a better supervisor and mentor for my Project Paper.
Besides my Supervisor, I would like to thank my brothers for making this possible
And I would thank to my friend abdullahi mudeey for his effort on valuable guidance and
support throughout this project.
My special thanks go to Said Ali Mahamoud for his special efforts
Sincere thanks goes to all my classmates especially Mohamed Hashi Weilak, Abdigani Dhorre ,
and Ayaan Sheikh Ahmed and others for their kindness and moral support during my research.
Thanks for the friendship and memories.
Last but not least, my deepest gratitude goes to my beloved parents: Amina nur and Ahmed
Mohamed and to my lovely brothers and sisters for providing me with unfailing support and
continuous encouragement throughout my years of study and through the process of researching
and writing this thesis. This accomplishment would not have been possible without them. Thank
you.

v
ABSTRACT
The purpose of this research is to investigate the Role of Islamic Banking Practice on SMEs
Development in Mogadishu. The study was intended specifically to determine and describe The
Islamic banking principles, objectives, contracts in promoting SMEs in Mogadishu, and
financing problems and challenges facing SMEs in Mogadishu. Due to the scarce literature,
which links Islamic finance and finance in general for SMEs, The main motive of this paper is to
find the role of Islamic banking practice on SMEs development in Mogadishu. Since Somali‘s
banks are increasing at alarming rate, there is a great need for SMEs to be financed to contribute
sustainable growth for the country‘s economic conditions. Quantitative study was carried out
which involved 45 questioners of closed end questions of target population in gathering primary
data with different groups of people such as the Bank Officials, SMEs Entrepreneurs. The
questionnaire are based the role of Islamic banking practice on SMEs development in
Mogadishu.
The research findings revealed that Murabahah is one of the most popular contracts of sale used
for purchasing commodities and other products on credit and Musharakah is most suited for
financing private or public companies and financing project that contributes for developing and
promoting Small Medium Enterprises in Mogadishu. The findings suggested that Islamic banks
should treat SMEs differently compared to big corporations and according to their needs.

vi
Table of Contents
LETTER OF TRANSMITTAL ...................................................................................................... ii
LETTER OF AUTHORIZATION ................................................................................................. iii
LETTER OF ACCEPTANCE ....................................................................................................... iv
ACKNOWLEDGEMENT .............................................................................................................. v
ABSTRACT ................................................................................................................................... vi
LIST OF TABLES ......................................................................................................................... xi
LIST OF FIGURES ...................................................................................................................... xii
INTRODUCTION ....................................................................................................................... 1
1.1. Background ...................................................................................................................... 1
1.2. Statement of the Problem ................................................................................................. 5
1.3. Objectives of the Study .................................................................................................... 6
1.3.1. General Objective ......................................................................................................... 6
1.3.2. Specific Objectives ....................................................................................................... 6
1.4. Research Questions .......................................................................................................... 6
1.5. Scope of the Study............................................................................................................ 7
1.5.1. Content Scope ............................................................................................................... 7
1.5.2. Geographic Scope ......................................................................................................... 7
1.5.3. Time Scope ................................................................................................................... 7
1.6. Significance of the Study: ................................................................................................ 7
1.7. Conceptual Framework: ................................................................................................... 7
CHAPTER TWO ............................................................................................................................ 9
LITERATURE REVIEW ............................................................................................................ 9
2.1. The Modern and the Concept of Islamic Banking System............................................... 9
2.2. The Principles of Islamic Banks: ..................................................................................... 9

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2.2.1. The Prohibition of Riba .................................................................................................. 10
2.2.2. The restriction of Gharar ................................................................................................ 11
2.3. Definition of Islamic Finance ......................................................................................... 13
2.3.1. Prohibition of Maysir (gambling and other games of chance) ................................... 13
2.3.2. Risk Sharing ............................................................................................................... 14
2.3.3. Justice and Equity Based ............................................................................................ 15
2.4. Islamic Banking Contracts ............................................................................................. 15
2.4.1. Barter Trading (Bay al-muqayada) ............................................................................. 16
2.4.2. General Sale (Bay' al-mutlaq)..................................................................................... 17
2.4.3. Exchange Sale (Bay' al-Sarf) ...................................................................................... 17
2.4.4. Mudarabah (Trustee Profit-Sharing) .......................................................................... 17
2.5. Objectives of Islamic Banking ....................................................................................... 22
2.6. Concept and Definition of Small and Medium-Sized Enterprises ................................. 24
2.6.1. Definitions of SME ..................................................................................................... 24
2.6.2. Islamic Financing Techniques for SMEs.................................................................... 25
2.6.3. Islamic Financing Options for SMEs ......................................................................... 26
2.6.4. The Challenges of Financing SMEs ........................................................................... 26
CHAPTER THREE ...................................................................................................................... 28
RESEARCH METHODOLOGY .............................................................................................. 28
3.1. Introduction .................................................................................................................... 28
3.2. Research Design ............................................................................................................. 28
3.3. Population and Sampling ............................................................................................... 28
3.3.1. Study Population......................................................................................................... 28
3.3.2. Sample Design ............................................................................................................ 28
3.3.3. Sampling Size ............................................................................................................. 29

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3.3.4. Sample Techniques ........................................................................................................ 29
3.4. Data Collection Methods ................................................................................................ 29
3.4.1 Research Instruments .................................................................................................... 29
3.4.2 Research Procedures ..................................................................................................... 29
3.4.3 Data Source ................................................................................................................... 29
3.5. Data Analysis ................................................................................................................. 30
3.6. Ethical Consideration: .................................................................................................... 30
3.7. Anticipated Limitations of the Study ............................................................................. 30
CHAPTER FOUR ......................................................................................................................... 31
DATA ANALYSIS AND FINDINGS ...................................................................................... 31
4.1. Introduction ........................................................................................................................ 31
4.2. Profile of Respondents ................................................................................................... 32
4.3. Role of Islamic Banking Principles in Promoting SMEs in Mogadishu. ....................... 38
CHAPTER FIVE .......................................................................................................................... 55
SUMMARY OF FINDINGS, CONCLUSION AND ............................................................... 55
RECOMMENDATIONS........................................................................................................... 55
5.1. Summary ........................................................................................................................ 55
5.1.1. The Profile Information of Respondents .................................................................... 55
5.1.2. Role of Islamic Banking Principles in Promoting SMEs in Mogadishu ........................ 56
5.1.3. The Importance of Objectives of Islamic Banking on Developments of ................... 56
5.1.4. Islamic Banking Contracts and Needs of SMEs in Mogadishu.................................. 57
5.1.5. The Financing Problems and Challenges Facing SMEs in Mogadishu...................... 58
5.2. Conclusion...................................................................................................................... 59
5.3. Recommendations .......................................................................................................... 61
5.4. Suggestions for Future Research .................................................................................... 61

ix
REFERENCES ............................................................................................................................. 63

x
LIST OF TABLES
Table 1: Gender of Respondents ................................................................................................... 32
Table 2: Education level of Respondents...................................................................................... 34
Table 3: How are you related with Islamic Finance? ................................................................... 35
Table 4: Period spent in the employment of this Institution ......................................................... 36
Table 5: How do you rate your level of overall knowledge in the Islamic banking system? ....... 37
Table 6: Islamic Banking and Financial Services is Investing in business where there is no
Gharar (more risk)......................................................................................................................... 38
Table 7: Islamic Banking and Financial Services is practically not indulged in businesses like
gambling, pornographic, alcohol, cinema and other forbidden businesses in Islam .................... 40
Table 8: Islamic Banking and Financial Services is promoting Islamic values and way of life
towards staff, clients and general public. ...................................................................................... 41

xi
LIST OF FIGURES
Figure 1: Age of Respondents...................................................................................................... 33
Figure 2: Education level of Respondents ................................................................................... 34
Figure 3: How are you related with Islamic Finance? .................................................................. 35
Figure 4: Period spent in the employment of this Institution........................................................ 36
Figure 5: How do you rate your level of overall knowledge in the Islamic banking system? ...... 37
Figure 6: Islamic Banking and Financial Services is Investing in business where there is no
Gharar (more risk)......................................................................................................................... 39
Figure 7: Islamic Banking and Financial Services is practically not indulged in businesses ...... 40

xii
CHAPTER ONE
INTRODUCTION
1.1. Background
The starting point of Islamic fund goes back to the beginning of Islam 1,400 years prior.
Authentic books composed amid the early long stretches of Islam demonstrated that amid the
1stcentury of Islam (AD 600), a few types of managing an account exercises existed that were
like current keeping money exchanges. The main sorted out Islamic monetary organization is
Baitul Mal, which means "Place of Money" and was set up in the beginning of Islam. Initially,
organization of charges, dissemination of zakat (riches assess), and overseeing government uses
were the primary capacity of Baitul Mal. Moreover, these antiquated books uncovered that Al-
Zubair container Al-Awam, a standout amongst the most well known identities in Islam, was
tolerating stores from individuals as credits and contributing that cash. At the season of his
demise, his obligation had achieved 2,200,000 dinar, as checked by his child Abduallah.
Likewise, he had a few branches in various parts of the Islamic Empire to return stores to their
proprietors. (Alharbi, 2015)
The beginning of the advanced Islamic managing an account framework can be ascribed to the
flood of change contemplations and thoughts that occurred in the late nineteenth and mid
twentieth hundreds of years in what was known as the Islamic resurgence developments. Amid
this time, Muslim masterminds and reformers restored and empowered the thoughts of
reapplication of Islamic standards to all parts of life and that adherence to shari'ah standards is
basic for Islam and Muslims. (EL TIBY, 2011)
The historical backdrop of current Islamic saving money can be separated into four periods
beginning from 1965 until the present, The principal time frame, The foundation time frame,
which kept going from 1965 until 1976 and saw numerous Islamic exercises over the Muslim
world, set the ground for building up the Islamic monetary framework, The foundation of
Muslim associations to advance participation and support among Muslim nations. The
foundation of a few Islamic banks over the Muslim world. This period additionally saw the
foundation of a few Islamic banks in the Arab world: Nasser Social Bank in Egypt in 1971;
Dubai Islamic Bank, set up in Dubai, United Arab Emirates, in 1975 by a gathering of

1
businesspeople from a few nations as the primary private Islamic bank on the planet; Faisal
Islamic Bank in Egypt in 1977; and Faisal Islamic Bank in Sudan in 1977—both as private
banks. In 1977, the legislature of Kuwait set up the Kuwait Finance House. (EL TIBY, 2011)
The second time frame, the spread time frame, which traversed from 1977 until 2002, was filled
by the sharp increment in oil costs that conveyed huge riches to the Middle East and the spread
of Islamic banks over the Islamic and non-Islamic nations. Amid this period, in excess of 100
Islamic banks were opened and working over the world. Likewise, regular banks began to give
and offer shari'ah-consistent items and administrations through devoted divisions in what wound
up known as Islamic windows. This period additionally saw the full change of the managing an
account framework in Iran, Sudan, and Pakistan to the Islamic saving money framework. The
change of the monetary framework was done quickly in both Iran in August 1983 and Sudan in
July 1984. In Pakistan, nonetheless, it was a progressive procedure that begun in 1947, was
formalized in the late 1970s, and was summed up in mid-1985. (EL TIBY, 2011)
The third time frame, the universal acknowledgment time frame appears to have extended from
2003 until the center of 2009. There are two noteworthy particular highlights in this period:
The worldwide acknowledgment of the shari'ah-agreeable monetary arrangements by the

administrative experts in Western Europe and the United States, especially by the Financial
Services Authority (FSA), the single money related controller in the United Kingdom.
The developing interest and association of the worldwide monetary monsters in Western Europe,
Japan, and the United States in Islamic money related exchanges. These incorporate ANZ
Grindlays, Citibank, Union Bank of Switzerland (UBS), Credit Swiss, and HSBC. Japanese
banks have additionally turned out to be associated with Islamic exchanges. The Industrial Bank
of Japan (IBJ) has built up an Islamic portfolio for Mudarib. The Bank of Japan and the Japan
Bank of International Cooperation, the two of which are government offices, have joined the
IFSB as onlookers. (EL TIBY, 2011)

2
The fourth time frame, the assessment time frame, appears to have started at some point amidst
2009, when investors, administrators, and controllers over the globe were assessing the causes
and results of the worldwide financial emergencies and the credit crunch confronting banks. In
spite of the way that it is still right on time to arrive at solid resolutions, numerous brokers and
also controllers are assessing the way that Islamic banks were the slightest influenced by the
credit smash because of its advantage based nature. The Banker's third yearly study in 2009 of
the world's best 500 Islamic money related Institutions demonstrates development resources at a
to a great degree solid rate of 28.6 percent to achieve resources of $822 billion of every 2009,
contrasted with $639 billion of every 2008. In ordinary keeping money, the rate of development
of benefits of the main 1,000 world banks declined from 21.6 percent in 2008 to 6.8 percent in
2009. (EL TIBY, 2011)
Islamic keeping money is built up and developing at exceptionally fast pace in the course of the
most recent two decades in the Muslim and non-Muslim nations as an option in contrast to the
premium based saving money framework (regular managing an account). As a matter of first
importance, Islamic bank was built up by Egypt named as Mit Ghamr Saving Bank presented by
Egypt in 1963 and over the most recent four decades Islamic managing an account development
expanded at extremely quick pace as far as size and in the quantities of players. At present,
Islamic saving money is working in excess of 60 nations of the world and evaluated development
rate is 15 - 20% per annum. (Ashraf, 2013)
Somalia's money related framework has been crushed by two many years of contention. In
January 1991, all state foundations that gave administrations and controlled the economy fallen,
including the Central Bank of Somalia and the whole saving money framework. The business
bank liabilities that had endure the 1989 chapter 11 of the main business bank in the nation
vanished. The nation has additionally been suspended from getting to worldwide money related
markets, a circumstance that bargains the use of the Transition Federal Government (TFG) in
household and additionally universal monetary markets. (Istanbul meeting on Somalia, 21 – 23
May 2010)
Generally money related division improvement is subject to a sound lawful and administrative
structure and the capacity of national banks to give the important help and supervisory
capacities. Without an unmistakable lawful structure authorized by a practical controller, there is
little degree for pulling in private division speculators to set up banks and other monetary
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foundations in Somalia. The universal network can work with the Somali specialists to set up the
fundamental lawful system and construct the limit of the focal keeping money structures,
concentrating on a lot of center need capacities. Speculators have communicated an enthusiasm
for setting up formal managing an account tasks in Somalia, yet have been compelled by the
nonattendance of a sound legitimate and administrative structure, a solid property rights culture,
enforceable insurance contracts, available credit data frameworks and related monetary
foundation. In this specific situation, the Somali budgetary area stays immature, casual and
unsupervised, with constrained access to credit and reserve funds, and no security for purchasers
and money related foundations. Aside from the constrained keeping money administrations
offered by the Central Bank, the primary performers in Somalia's monetary part are the Somali
settlements organizations, which have broad systems of operators that benefit all towns and
towns in the nation, and additionally real urban areas in nations populated by Somali Diaspora.
The restricted working of the Central Bank additionally compels private segment advancement
as it comprises a genuine hazard factor to the speculation atmosphere for customary Somalis and
business working in the nation. A noteworthy interest for money related administrations from the
two people and little medium endeavors (SMEs) stays unsatisfied, even at essential dimensions.
(Istanbul meeting on Somalia, 21 – 23 May 2010)
Little and Medium Enterprises (SMEs) make up the main part of the monetary tissue of the
economy. In creating nations, they speak to the larger part of business, including female work.
Putting resources into SMEs is a long haul and keen system, with supportable returns that
duplicate crosswise over districts, nations and social orders. SMEs establish the greater part of
firms. Comprehensively, SMEs make up over 95% all things considered, represent roughly half
of GDP and 60%– 70% of aggregate work, when both formal and casual SMEs are considered.
This adds up to between 420 million and 510 million SMEs, 310 million of which are in
developing markets. Elevating access to back for SMEs has been on the worldwide change plan
since the worldwide money related emergency. (Elasrag, 2016)

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1.2. Statement of the Problem
Albeit Islamic back is becoming quickly all around the globe and the thoughts identified with
Islamic managing an account and fund are presently 30 years of age, Islamic keeping money
hypothesis is as yet not all around created. In spite of the fact that there is an abundance of
writing around Islamic back and around fund when all is said in done for SMEs, writing that
draws and interfaces these two territories together is constrained. A case of this disengagement
concerns exchanging which is a standout amongst the most widely recognized exercises for
Islamic banks.
Islamic banks are compelled to wind up engaged with the way toward moving and purchasing
products as per the exchange rules recommended by Islamic law. They are qualified for benefit
by attempted business dangers, for example, those engaged with genuine division business
(Ayub, 2007). Without the intrigue framework in business exchanges, there are sorts of
budgetary contracts which are displayed in Islamic statute as options to Riba.
Additionally, the writing on Islamic keeping money and back has concentrated on a couple of
credit-based instruments recommending that exploration in the field of Islamic fund is as yet
falling behind. The superseding worry in designing or adjusting new monetary instruments has
been meeting the sharia (Islamic law) necessity legalistically while the maqasid Sharia (targets of
Islamic law) has not gotten due consideration. All business and back contracts in the structure of
Islamic fund need to fit in with Sharia guidelines and mean to meet the goals of Islamic law
(Ayub, 2007).
Then again Small Medium Enterprises (SMEs) have huge job in business creation and
development of gross local results of creating nation. Be that as it may, so as to develop and
contribute all the more essentially to the economy, SMEs confront a few limitations. (Huda,
2012)
Because of the rare writing, that joins Islamic back and fund when all is said in done for SMEs
and given the absence of supporting exact proof on the Islamic financing of SMEs, especially in
Mogadishu, it is vital and convenient to analyze the job of Islamic managing an account practice
on the advancement of SME in Mogadishu.

5
The primary thought process of this paper is to discover the job of Islamic saving money practice
on SMEs advancement in Mogadishu. Since Somali's banks are expanding at disturbing rate,
there is an incredible requirement for SMEs to be financed to contribute manageable
development for the nation's financial conditions.
1.3. Objectives of the Study

The destinations of the examination were classified into general and explicit as pursues:
1.3.1. General Objective
The General target of the investigation was to recognize the job of Islamic keeping money
practice on SMEs improvement in Mogadishu.
1.3.2. Specific Objectives
The explicit destinations are among the accompanying:
 To explore and break down job of Islamic managing an account standards in
advancing SMEs in Mogadishu.
 To discover significance of Islamic saving money targets on advancements of
SMEs in the City.
 To survey how Islamic Banking rehearses (contracts) address the issues of SMEs
in Mogadishu.
 To basically assess the financing issues and difficulties confronting SMEs in
Mogadishu.
1.4. Research Questions
 What is the job of Islamic managing an account standards in advancing SMEs in
Mogadishu?
 What is the significance of Islamic managing an account targets on improvements
of SMEs in the City?
 How do Islamic Banking rehearses (contracts) address the issues of SMEs in
Mogadishu?
 What financing issues and difficulties do SMEs experience in Mogadishu?

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1.5. Scope of the Study
Extent of the examination incorporates, content degree, geographic extension and time scope:
1.5.1. Content Scope

The investigation was constrained to Islamic managing an account practice, and how contributes
SMEs improvement in Mogadishu
1.5.2. Geographic Scope

The examination depended on poll directed in Islamic Banks and private company business
visionaries in Mogadishu.
1.5.3. Time Scope

The examination was done in the Academic semester of 2018
1.6. Significance of the Study:
To the scholarly analysts, the examination would make a critical commitment to the current
assemblage of learning in the field of Islamic Banking. The discoveries would be utilized as a
wellspring of reference for different analysts. Furthermore, scholarly specialists would require
the examination discoveries to invigorate further research in these territories and in that capacity
it would frame a premise of good foundation for further research. Additionally, this investigation
is fundamental for making duplicates of study and disseminations of open library for perusing
reason.
1.7. Conceptual Framework:
The investigation relates a lot of free factors which incorporates Islamic saving money
Objectives, capacities, standards, and Islamic Banking contracting to one ward variable of
financing SMEs. The factors are in the containers while the connections are appeared by bolts as
appeared as follows:

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CHAPTER TWO
LITERATURE REVIEW
2.1. The Modern and the Concept of Islamic Banking System
Although Islam has provided a blueprint of how a society is to be organized and how the affairs
of its members are to be conducted in accordance with its prescriptions, with the exception of a
brief period following its inception the system itself has not been applied in its entirety. The
economy at that time was, of course, much less complex than the economies of modern times.
The business practices of the day conformed to the principles of Islam and the element of
―interest‖ was minimized. Indeed, the practice of interest was also condemned by other major
religions and the institution of interest had yet to be developed. It is only in recent decades, when
the element of interest became an integral part of economic life, that Muslims have been forced
to become more conscious of its existence at a time of growing interest in the wider
implementation of Islamic teachings. It is for this reason that the history of Islamic economics
finance is limited to developments since the nineteenth century. (ZAMIR IQBAL, 2011)
2.2. The Principles of Islamic Banks:

Islamic fund is controlled by Sharia, the lawful structure of Islam and its Quranic elucidation,
alongside the lessons of Sunna. This system gives rules to individuals to pursue the standards of
the Holy Quran and the Sunna in their basic leadership in all parts of life. Monetary exchanges
are one of the more essential dealings controlled by Sharia, apparently to guarantee the more fair
dispersion of salary and riches among Muslims in Islamic economies. (Alsadek H. Step, 2007)
The general standards are as per the following: (I) the disallowance of Riba (usury or exorbitant
intrigue) and the expulsion of obligation based financing from the economy; (ii) the forbiddance
of Gharar, incorporating the complete honesty of data and evacuation of any hilter kilter data in
an agreement; (iii) the avoidance of financing and managing in evil and socially flippant
exercises and wares, for example, betting and the generation of liquor; (iv) chance sharing, the
supplier of money related assets and the business visionary offer business hazard as an end-result
of offers of benefits and misfortunes;
(v) Materiality, a budgetary exchange needs a 'material irrevocability', that is an immediate or
backhanded connect to a genuine monetary exchange; and (vi) equity, a money related exchange
ought not prompt the misuse of any gathering to the exchange. (Alsadek H. Walk, 2007)

9
2.2.1. The Prohibition of Riba
Any foreordained installment well beyond the genuine measure of vital is precluded. Islam
permits just a single sort of advance and that is qard al hassan (actually 'great advance'), whereby
the bank does not charge any premium or extra sum over the cash loaned. (Kettell, 2011)
Conventional Muslim Jurists have translated this guideline so entirely that, as indicated by one
Islamic researcher, 'the restriction applies to any favorable position or advantages that the bank
may anchor out of the qard (credit, for example, riding the borrower's donkey, eating at his table
or notwithstanding exploiting the shade of his divider'. (Kettell, 2011)
It is for the most part contended that the disallowance of Riba (usury or intrigue, regardless of
whether little or extensive) is the most imperative standard of Islamic back. Any intrigue or
foreordained installment well beyond the real measure of guideline is unequivocally restricted by
the Holy Quran and the Sunna. (Alsadek H. Walk, 2007)
The proof from the Holy Quran and the Sunna as pursues:
The individuals who eat up usury won't remain aside from as stands one whom The Evil One by
his touch hath headed to frenzy. That is on the grounds that they state: Trade resembles usury. In
any case, Allah hath allowed exchange and taboo usury (2:275).
O Ye who accept! Dread Allah and surrender what survives of your interest for usury, if Ye are
undoubtedly devotees. In the event that ye do it not, consider war from Allah and His Apostle.
Yet, on the off chance that Ye turn back, Ye will have your capital totals: Deal not unjustifiably
and Ye will not be managed treacherously (2:278-279).
The Prophet has denounced both the collector and the provider of usury. It is guaranteed that the
prophet stated: Sell not gold for gold aside from in equivalent amount, nor move silver for silver
with the exception of in equivalent amount, nor move anything present, for that which is missing.
In this custom, gold and silver were utilized as cash in Muhammad's time when usury on these
materials was taboo. Likewise another Hadith (or message) from the Sunna that:

10
Muslim described on the specialist of Abou Said Al-Khudriy: Bilal visited the Messenger of
Allah with some top notch dates, and the prophet asked about their source. Bilal clarified that he
exchanged two volumes of lower quality dates for one volume of higher quality. The Messenger
of Allah stated: "this is definitely Riba! Try not to do this. Rather, move the primary kind of
dates, and utilize the returns to purchase the other. It is obvious from the over that Riba (usury or
intrigue) is entirely taboo. (Alsadek H. Walk, 2007)
2.2.2. The restriction of Gharar

The second critical disallowance in Islamic fund is Gharar, for the most part interpreted as
hazard, danger or vulnerability. An Islamic money related framework demoralizes accumulating
and disallows exchanges highlighting outrageous vulnerability, betting, and hazard. (ZAMIR
IQBAL, 2011)
gharar (actually 'danger'). While riba and maysir are denounced in the Holy Qur'an, judgment of
gharar is bolstered by ahadith. In business terms, gharar intends to attempt an endeavor aimlessly
without adequate information or to embrace an unnecessarily hazardous exchange, albeit minor
vulnerabilities can be allowed when there is some need.
In a general setting, the consistent perspective of the legal scholars held that, in any exchange, by
coming up short or fail to characterize any of the basic mainstays of agreement identifying with
the thought or proportion of the article, the gatherings attempt a hazard which isn't fundamental
for them. This sort of hazard was esteemed unsuitable and commensurate to hypothesis on
account of its innate vulnerability. Theoretical exchanges with these qualities are hence
precluded. (M. Kabir Hassan, 2007)
Imam Malik characterizes Gharar as the closeout of an article which is absent and in this way
whose nature of being great or awful isn't known to the purchaser: as in the clearance of a
runaway slave or a creature which has been lost by its proprietor, or the closeout of a posterity
still in the belly of its mom, or purchasing of olives with olive oil, or sesame with sesame oil or
spread with margarine oil. These are for the most part unlawful deals as indicated by Imam
Malik on account of the inclusion of the component of possibility. (Ayub, 2007)

11
This denial applies in various conditions, for example, when the vender isn't in a situation to
hand over the merchandise to the purchaser or when the topic of the deal is unequipped for
procurement, for instance the closeout of organic product which isn't yet aged, or fish or fowls
not yet got; that is, short-moving. Theoretical business, such as purchasing merchandise or offers
at low costs and moving them at greater expenses later on, is viewed as unlawful.
Gharar applies additionally for speculations, for example, exchanging prospects on the share
trading system; in reality, gharar is available in all future (mudhaf) deals and, as indicated by the
agreement of researchers, a gharar contract is invalid and void (batil). (M. Kabir Hassan, 2007)
The 1970s saw the rise of various Gulf-based Islamic banks, remarkably Dubai Islamic Bank and
the Islamic Development Bank. The principal Islamic protection (takaful) organization was set
up in 1979 − the Islamic Insurance Company of Sudan. The 1980s saw national monetary
frameworks pronouncing their expectation to go to full Shari'a frameworks, upheld by the 1981
Organization of the Islamic Conference in Khartoum. The International Monetary Fund began to
distribute
data on Islamic money related structures and over the Muslim world, insightful premium
expanded and a wide range of items created. With the foundation of the Accounting and
Auditing Organization for Islamic Financial Institutions in 1990, and the Islamic Financial
Services Board in 2002 setting out new norms for Islamic fund and improvement of money
related administrations, the institutional framework began to end up considerably more advanced
and western banks and establishments began to include themselves through offering non-
enthusiasm bearing securities and files intended for the Shari'a advertise. A century after
Barclays opened its Cairo branch, the Islamic back area was simply beginning to expand its
intrigue to the mass retail showcase. It has created at a considerable rate in the last quarter of the
twentieth century, every decade seeing increasingly more refinement and widening of its market.
In the early long stretches of the 21st century, it is ready to extend exponentially into the retail
managing an account area and turn into the quickest developing component of worldwide saving
money. As it develops, the examination of money related items and business forms by senior
Muslim researchers keeps on winding up increasingly advanced and significant. Discussion and
contention will proceed as certain new items develop, which some may consider to conflict with
12
the soul of Shari'a, in spite of the fact that their constituent components themselves are passable.
Just through this persistent innovation, evaluation and reappraisal will a solid, adaptable yet
agreeable Islamic fund structure completely create, and grow over the world's business sectors.
(Anwar, 2008)
2.3. Definition of Islamic Finance

What is Islamic back? Definitions extend from the specific restricted (premium free managing an
account) to the plain wide (monetary activities directed by Muslims). A helpful definition is the
accompanying: Islamic budgetary organizations are those that are based, in their targets and
tasks, on Koranic standards. They are therefore separate from 'traditional' organizations, which
have no such distractions. This definition goes past basically likening Islamic fund with
'premium free' saving money. It permits to consider tasks that could conceivably be sans intrigue,
however are in any case permeated with certain Islamic standards: the evasion of riba (in the
wide feeling of unjustified increment) and gharar (vulnerability, chance, theory); the emphasis on
halal (religiously reasonable) exercises; and all the more by and large the mission for equity, and
other moral and religious objectives. (Warde, 2000)
An extensive number of Islamic back definitions are found in the writing, running from the
generally basic definitions for explicit angles (state, Islamic keeping money) to progressively
complex definitions covering every single monetary task, (Alsadek H. Step, 2007) , for instance,
Islamic fund is characterized as a monetary administration basically executed to follow the
2.3.1. Prohibition of Maysir (gambling and other games of chance)

The words Maisir and Qimar are utilized in the Arabic dialect indistinguishably. Maisir alludes
to effortlessly accessible riches or securing of riches by shot, regardless of whether it denies the
other's correct. Qimar implies the round of shot – one increases at the expense of other(s); an
individual puts his cash or a piece of his riches in question wherein the measure of cash in danger
may bring tremendous entireties of cash or may be lost or harmed. While the word utilized in the
Holy Qur'an for forbiddance of betting what's more, betting is "Maisir" (sections 2: 219 and 5:
90, 91), the Hadith writing talks about this demonstration for the most part for the sake of
"Qimar". (Ayub, 2007)

13
As indicated by the law specialists, the contrast among Maisir and Qimar is that the last is a vital
sort of the previous. "Maisir", got from "Yusr", implies wishing something important easily and
without paying a proportionate remuneration ('Iwad) for it or without working for it, or without
undertaking any obligation against it, by method for a round of possibility.
"Qimar" likewise implies receipt of cash, advantage or usufruct at the expense of others, having
privilege to that cash or advantage by falling back on shot. The two words are appropriate to
diversions of shot. References from the Holy Qur'an in such manner are:
"O you who accept! Intoxicants and betting, relinquishing to stones, and divination by bolts, are
odious activities of Satan; so refuse them, that you may thrive." (5: 90)
o "Satan plans to energize ill will and disdain among you with intoxicants and betting, and
upset you from the recognition of Allah, and from petition; will ye not then go without?"
(5:91)
o "They ask thee concerning wine and betting. State: 'In them is incredible sin and a few
advantages for individuals; however the wrongdoing is more noteworthy than the
advantages'." (4: 219)
Maisir and Qimar are engaged with various customary money related exchanges and bank
plans/items which Islamic banks need to stay away from. Traditional protection isn't Sharı'ah-
consistent because of the inclusion of both Riba and Maisir. Governments and open/private
division partnerships assemble assets based on lottery and draws, which go under the pennant of
betting and are, in this way, denied. Present prospects and alternatives gets that are settled
through value contrasts just are secured under betting. (Ayub, 2007)
2.3.2. Risk Sharing
Since premium is restricted, unadulterated obligation security is wiped out from the framework
and accordingly providers of assets move toward becoming financial specialists, instead of
lenders. The supplier of money related capital and the business visionary offer business hazards
as a byproduct of offers of the benefits and misfortunes. (ZAMIR IQBAL, 2011)
Another center guideline of Islamic financial matters is the thought of hazard sharing. This
depends on the standard of obligation, which expresses that benefit is defended based on
assuming liability, conceivably notwithstanding getting to be in charge of the misfortune and the
14
outcomes. This lawful adage, said to be gotten from a truism of the Prophet (pbuh) that "benefit
accompanies obligation," suggests that Shari'ah recognizes legitimate benefit from every single
other type of gain and that privilege to benefit exists just when there is likewise the obligation, or
hazard, of misfortune. (ZAMIR IQBAL, 2011)
Islamic fund urges individuals to contribute their cash successfully with no bad form for the
individuals who are either banks or borrowers. As per this guideline, loan specialists should
impart to borrowers the benefits or misfortunes from the subsidized undertaking. Generally this
is taken as they ought to similarly convey the danger of their business, reliable with their sharing
of the capital added to the endeavor. A benefit sharing rule and a benefit/misfortune sharing
guideline. (Alsadek H. Stride, 2007)
2.3.3. Justice and Equity Based

The utilization of Islamic rules in back isn't only to clean the money related framework from
premium and Gharar, rather it is to build up equity in fund for which Riba and Gharar have been
denied. Islamic back attempts to advance social equity and value in human culture. Equity in
business or association necessitates that both the gatherings ought to contribute money, resources
or work and bear or offer the hazard in business. Based on commitment and hazard bearing or
sharing, the benefit and misfortune are circulated to the gatherings. As to exchange, the Shariah
gives the decisions to shield the shoppers from makers or dealers in case of the last controlling
costs, and shield the makers or venders from purchasers should the last cease from paying or
default in their installment without a substantial reason. Thusly, foundation of equity and value
turns into the extra component of Islamic back. (Marifa Academy, 2014)
2.4. Islamic Banking Contracts
In Islam, an agreement is esteemed lawful and legitimate by the Shari'ah if the terms of the
agreement are free of any denial. At the end of the day, if an agreement does not have or include
any of the disallowed components, for example, riba or gharar, and does not damage some other
standard or law it is viewed as substantial. For instance, despite the fact that an agreement to put
resources into an organization creating liquor might be free of riba and gharar, it would even
now be invalid according to the Shari'ah, since it manages the generation of liquor, which is
disallowed in Islam. A few business contracts have their underlying foundations in the pre -
Islamic period however have been additionally created and broadly rehearsed after their
similarity with the standards of Shari'ah was learned and affirmed.
15
The Islamic monetary framework has a lot of center contracts, which fill in as building hinders
for structuring progressively advanced and complex budgetary instruments. There is no settled
order of agreements in the Islamic lawful framework thusly, yet from a business and business
perspective, certain agreements can be gathered together as per their capacity and reason in the
monetary and money related framework.
Value-based Contracts manage the genuine - part monetary exchanges that encourage the trade,
deal and exchange of products and ventures. The center value-based contracts depend on
exchange
Or trade - based exercises. Trade could be on the spot or on a conceded premise and could be of
products for merchandise, or of merchandise for cost, or merchandise for guarantee to pay. These
agreements make resources, which further turn into the premise of financing and speculation
openings; in this way they shape the plain center of an all-encompassing monetary and money
related framework.
Financing Contracts offer approaches to make and broaden credit, encourage financing of value-
based contracts, and give channels to capital arrangement and asset assembly among speculators
and business visionaries. The distinctive element of such financing contracts is the
nonappearance of an obligation contract. Financing contracts are implied either for the financing
of value-based contracts as exchange fund or resource - upheld securities, or for giving capital
through value associations, which can take a few structures, for example, organization, co -
possession, or decreasing association.
Intermediation Contracts is to encourage a proficient and straightforward execution of value-

based and budgetary contracts. These agreements incorporate mudarabah (a trustee fund
contract), musharakah (value organization), kifala (ensure), amanah (trust), takaful (protection),
wakalah (office) and jo'alah (expense - based administration). (ZAMIR IQBAL, 2011)
2.4.1. Barter Trading (Bay al-muqayada)

It very well may be considered as the main contract of offer in which merchandise were traded
for different products. This agreement was generally rehearsed in the early times of mankind's
history. Amid the season of Prophet Muhammad (Peace be up on Him), this was the general
practice. There is no explicit preclusion found in the Quran or Sunnah about the act of this sort of

16
agreement. Nonetheless, Shariah does not energize the act of this agreement to stay away from
any component of shamefulness in return of products. (Marifa Academy, 2014)
2.4.2. General Sale (Bay' al-mutlaq)

This is a closeout of products for cash and was created when the issue of trade emerged in the
deal framework. It is the most favored method of exchanging as it can reasonably esteem and
decide the cost of merchandise. The significance of closeout of merchandise for cash can be
comprehended from the Hadith in which the Prophet (Peace arrive) disallowed the trading of
second rate nature of dates for better quality and instructed than move the blended dates
concerning mediocre quality for cash and purchase prevalent quality with that cash. (Marifa
Academy, 2014)
2.4.3. Exchange Sale (Bay' al-Sarf)

Cove' al-Sarf is the trading of one fiscal shape for another in the equivalent or diverse sort or
classification, i.e., gold for gold coins, silver for silver, gold for silver, silver for gold, and so
forth., regardless of whether it is as adornments or mintage. In any case, such exchanging must
be done in consistence with the accompanying Shariah guidelines and statutes:
The two gatherings must claim the counter qualities previously scattering, such belonging being
either real or useful.
 The counter estimations of similar cash must be equivalent in sum, regardless of whether
one of them is in paper cash and the other is in coin of a similar nation, similar to a note
of one pound for a coin of one pound.
 The contract will not contain any contingent choice or delay provision with respect to the
conveyance of one or both counter qualities.
 The managing in monetary forms will not go for setting up a syndication position, nor
should it involve any underhanded results to the enthusiasm of people or social orders.
2.4.4. Mudarabah (Trustee Profit-Sharing)
A bank may embrace to back worthy activities as per the rule of mudarabah. Here the bank goes
about as the "supplier of capital" and will offer 100 percent financing for the important
undertaking, while the initiator of the task is the "business visionary" who will deal with the
venture. The bank can't meddle in the administration of the venture, however has the privilege to
attempt the development and supervision undertaking. In these conditions, the two gatherings
will concurred, through arrangement, on the proportion of the circulation of the benefits
produced from the undertaking, assuming any; in case of the task making a misfortune, at that
point the bank bears every one of the misfortunes. (Venardos, 2005)
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As indicated by (M. Kabir Hassan, 2007) characterizes Mudaraba as a type of association in
which one accomplice (rabb al-mal) accounts the undertaking, while the other party (mudarib)
oversees it. Albeit like a musharaka, this method of financing does not necessitate that an
organization be made; the money related foundation gives the majority of the capital and the
client is in charge of the running of the task. Benefits from the speculation are circulated by a
settled, foreordained proportion. The rabb almal has ownership of the advantages, however the
mudarib has the choice to purchase out the rabb al-mal's venture. Mudaraba might be finished up
between an Islamic bank, as supplier of assets, for itself or for its investors as a trustee of their
assets, and its business– proprietor customers. In the last case, the bank goes about as a mudarib
for an expense. The bank likewise goes about as a mudarib in connection to its contributors, as it
puts the stores in different plans. (M. Kabir Hassan, 2007)
The mudaraba contract is a benefit sharing contract. Mudaraba is consequently saved for
business fund, it isn't appropriate for customer back. Mudaraba is utilized in exchange fund and
in venture ventures with short growth periods, yet it isn't exceptionally famous, aside from its
utilization as a type of store taking by banks. The way that misfortunes are only borne by the
agent carries with it genuine organization issues. (Visser, 2009)
The Distinct Features of Mudarabah

As per (ZAMIR IQBAL, 2011) the mudarabah has the accompanying unmistakable highlights:
Control Although Shari'ah researchers have contrasts of conclusion about the limitations in a
mudarabah contract with respect to its exercises, extension, and targets, these distinction don't
have any huge effect on its capacity. As a rule, the speculator assigns the mudarib as an operator
and subsequently does not have any privilege to control, or take part in, the mudarib's choices
with regards to the position of assets. As it were, the financial specialist does not have any
administration rights over the mudarib, who is allowed to choose the ventures in which to put or
the way in which to contribute.
Benefit/Loss Sharing One of the most huge highlights of mudarabah is that while the benefits are
shared between the financial specialist and the operator, any misfortune in the venture or
business is borne exclusively by the capital - proprietor, except if such misfortune is caused by
the unfortunate behavior or carelessness of the mudarib. In situations where the specialist
demonstrations in compliance with common decency and wisely, yet the speculation results in a
18
misfortune, the capital proprietor loses a segment of the capital, yet the operator loses the time
and exertion conveyed amid the business adventure. The mudarib isn't an underwriter of the
capital, with the exception of where there is unfortunate behavior or carelessness on his part.
Benefit Distribution in the mudarabah agreedment, the accomplices appreciate total opportunity
to decide the division of benefits. Coming up next are a portion of the guidelines pertinent to the
assurance and conveyance of benefit and misfortune under a mudarabah:
 The most basic necessity is that the division of benefits between the financial specialist
and mudarib must be as extents and proportions, instead of in outright numbers.
 The benefit - sharing recipe itself must be made explicit in advance and should be plainly
demonstrated in the agreedment revenue driven dispersion. Neither one of the parties can
have particular rights over the benefits to the prohibition of the other.
 The benefit appropriation proportion may contrast from that of capital commitment.
 The appropriation of benefits in a mudarabah can just happen after the capital - proprietor
has recovered his capital.
Various levels Early Shari'ah researchers assumed an essential job in the advancement of
complex intermediation structures by giving the important opportunity to the mudarib to frame
different associations with outsiders. (ZAMIR IQBAL, 2011)
Credit Risk and Defaults since there may not be any unmistakable resources that can be utilized
as security against potential misfortunes, dealing with the credit hazard and defaults regularly
turns into an issue. To limit such hazard, the capital – proprietor or financial specialist ought to
perform due steadiness in regard of the past execution and notoriety of the mudarib. (ZAMIR
IQBAL, 2011)
Musharakah (Partnership or Joint Venture)
The association is a pre - Islamic get that was generally acknowledged and advanced by the
Prophet (pbuh). The musharakah — a half breed of the shirakah (association) and the mudarabah
— is a mix of speculation and the board. Without obligation security, the Shari'ah advances the
musharakah type of financing and is genuinely far reaching in characterizing diverse sorts of
associations, in distinguishing rights and commitments of the accomplices, and in stipulating the
principles

19
overseeing the sharing of benefits and misfortunes. A musharakah or shirakah can be
characterized as a type of organization where at least two individuals join either their capital or
work to share the benefits and misfortunes, and where they have comparative rights and
liabilities. (ZAMIR IQBAL, 2011)
Musharakah is a game plan where at least two gatherings build up a joint business venture and
all contribute capital and additionally work and the executives when in doubt". The benefits and
misfortunes that spill out of the Musharakah are again shared among the gatherings on a pre-
agreedd proportion. By and large, Musharakah is most suited for financing private or open
organizations and task financing. With regards to Islamic managing an account, Musharakah is
portrayed as a joint endeavor between an Islamic bank and a client or business firm for specific
activities. The Islamic bank can possibly go about as the reserve supplier to back industry,
exchange and every legitimate venture through either value speculation or direct cooperation.
Musharakah contracts can be set up in one of two different ways. The principal method for these
is a perpetual contract which guarantees for its gatherings (the financial specialist, bank and
business visionary) a fair offer in the yearly benefit/misfortune on pre-agreedd terms. This sort of
lasting contract holds consistent for a constrained or boundless period as indicated by the first
agreedment. The second sort of Musharakah is a lessening contract favored by investors since it
enables the bank to diminish a lot of value every year and get intermittent benefits dependent on
the decreasing value balance. In this frame, the value offer of the client in the capital of big
business increments after some time until the person turns into the sole proprietor of the
undertaking. As appeared, musharakah has numerous points of interest that give parallel
advantages to all gatherings and there is an agreement among Islamic researchers of its
legitimacy under Sharia. Be that as it may, Musharakah contracts more often than not require the
assistance of legitimate specialists to guarantee that any potential Riba or Gharar is cautiously
kept away from. (Alsadek H. Step, 2007)
Bai'Salam/Salaf (Prepaid Purchases)

Bai' Salam is an old type of forward contract wherein the cost was paid ahead of time at the
season of making the agreement for recommended products to be conveyed later. The two terms
"Salam" and "Salaf" have been utilized conversely in Hadith writing to portray the agreement for
futuredelivery of indicated merchandise with in advance installment of the cost.

20
Salam has been allowed by the sacred Prophet (pbuh) himself, with no distinction of supposition
among the early or the contemporary legal advisers, despite the general standard of the Sharı'ah
that the clearance of a product which isn't in the ownership of the merchant isn't allowed. Upon
relocation from Makkah, the Prophet came to Madinah, where the general population used to pay
ahead of time the cost of organic product (or dates) to be conveyed inside one, two and three
years. In any case, such a deal was done without indicating the quality, measure or load of the
ware or the season of conveyance. The blessed Prophet structured: "Whoever pays cash ahead of
time (for organic product) (to be conveyed later) should pay it for a known quality, determined
measure and weight (of dates or natural product) obviously alongside the cost and time of
conveyance". (Ayub, 2007)
Benefits of Salam and the Economic Role of Bai'Salam

Forward deal as Salam has been permitted by the Sharı'ah with such a structure, to the point that
it turns out to be free from Riba, Gharar and, in this manner, from abuse of one gathering by the
other. It is somewhat founded on veritable need of the business and, in this way, valuable to both
purchaser and dealer. The dealer gets ahead of time the cash he needs in return of commitment to
convey the item later. In this manner, he profits by the Salam deal by covering his
money/liquidity needs in regard of individual costs or for beneficial or exchanging action. The
buyer gets the product he has wanted to exchange at the time he chooses. He will likewise profit
by modest costs, in light of the fact that normally the Salam cost is less expensive than the
money advertise cost. Along these lines he will likewise be anchored against vacillations of cost.
The monetary job which Bai'Salam should perform can be summ
(Marifa Academy, 2014) Defines BBA is a sale contract in which the payment of the price is
deferred and payable at a particular time in the future. The distinguishing feature of BBA is that
in BBA the payment is always deferred.
Al-ijara (Leasing)
This is normally a money related rent sort of agreement connected for renting of advantages with
intermittent rent rental installments and consummation with clearance of the benefits at
ostensible cost. (Venardos, 2005)
As demonstrates (Warde, 2000) Ijara or renting is likely the quickest developing movement of
Islamic money related foundations. The rule is outstanding and for all intents and purposes
indistinguishable to regular renting: the bank rents an advantage for an outsider in return for a
predefined lease. The measures of installments are known ahead of time and the advantage
21
remains the property of the lessor. Just in a couple of regards do Islamic contracts contrast. A
minor departure from the fundamental guideline is ijara wa iktina, a rent buy agreedment
whereby at the lapse of the rent, the renter turns into the proprietor of the benefit.
Al-qardh al-Hasan (Benevolent Loans)

Al-qardh al-Hasan (Benevolent Loans) — these are advances which are returned toward the
finish of an agreedd period with no intrigue or offer in the benefit or loss of the business. Along
these lines, it is a sort of unnecessary credit given to the poor individuals for a settled period
without requiring the installment of intrigue or benefit. The collector of qard al-hasan is just
required to reimburse the first measure of the credit. (Venardos, 2005)
The demonstration of loaning cash isn't taboo in Sharia, just Riba is denied during the time spent
loaning. Qard Hassan is a generous credit without enthusiasm to help the destitute trying to
mitigate hardship. Subsequently, people and firms may loan cash on a premium free premise to
any number of recipients for some, reasons, including costs identifying with instruction and
marriage. The sum paid by the moneylender is viewed as a premium free advance from the
season of installment until the date of the repayment. (Alsadek H. Stride, 2007)
2.5. Objectives of Islamic Banking

In the present investigation Objectives of Islamic Finance is displayed under three heads
specifically
1. Religious Objectives i.e. gathering and conveying Zakat. Zakat (a religious commitment)
is paid by Muslims and saved into a reserve that is disseminated to the poor specifically
or through religious foundations. Zakat is forced at a rate generally proportionate to 2.5
percent of the market estimation of a person's genuine and monetary property. Zakat may
likewise be forced on the underlying capital of an Islamic bank, its stores, and its
benefits.
2. Social Objectives i.e. easing of neediness and evacuating social disparities. Asset
enhancement: Funding is given just to ventures that, in the bank's gauge, have the most
good return-for-hazard estimates, notwithstanding meeting the paradigm of being socially
gainful. Ventures are chosen essentially based on their foreseen benefit as opposed to the
financial soundness of the borrower.

22
3. Economic Objectives i.e. expansion of benefit , advancement of manageable ventures ,
limiting expense of activity , upgrading item and administration quality and offering
aggressive money related items.
Impartial Distribution of Resources: One of the points of Islamic managing an account is to serve
the less blessed by advancing the evenhanded conveyance of assets. The dissemination of pay
and assets of Islamic budgetary structures is planned to be proportionate to the esteem offered by
partaking parties.
Monetary Development: Participatory-type financing for framework ventures, in light of

mudharabah (benefit sharing) and musharakah (joint endeavor), is planned with the goal that
speculation comes back to both the supplier and the client of assets will mirror the
accomplishment of the undertaking. The component of sharing benefits prompts a nearby
working connection among bank and business person and is accepted to energize financial
advancement because of the bank's value type stake in the financed venture.
Dependability in Money Value: Stability in the estimation of cash is accepted to be upgraded by

necessitating that money be supported by a hidden resource, which empowers the vehicle of
trade to be a solid unit of record. Islam perceives cash as a store of riches and as a methods for
trade yet does not see cash as an item that ought to be purchased and sold at a benefit.
In Islam the principle goal of financial exercises is to give most extreme prudent things which
will be useful to expand benefit. Further Quran says that Islamic Finance ought to ensure the
enthusiasm of the denied and persecuted i.e. to spin the cash in every one of the gatherings of the
general public so as to mitigate destitution. (Hafiz Iftikhar Ahmed, 2007)
Islamic banks (non – premium bank) need to work as per the shariah (Islamic law) and they have
distinctive targets to encourage and enhance the prosperity of an individual and the economy
everywhere; among these goals are:
 To advance, encourage and build up the utilization of Islamic standards, law and custom
to the exchange of monetary and related business issues.
 To advance venture crusades, endeavor and concerns which are they occupied with legal
business exercises.

23
 Investors getting their arrival from benefit and business sharing (PLS) venture. (Ajagbe
T. S., 2013)
2.6. Concept and Definition of Small and Medium-Sized Enterprises:

The advancement of little and medium-measure endeavors assumes a vital job in the
development and thriving of country. Albeit substantial scale partnerships, especially modern
concerns contribute sizably/to a great extent in gross residential items (GDP) and other financial
factors of thriving yet the noteworthiness of SMEs is broadly perceived far and wide. SMEs
make a generous commitment towards GDP, income gathering as assessments, cultivating
business enterprise culture, work openings, salary age, abilities improvement of HR, neediness
easing, and enhancing the way of life and personal satisfaction.
Over all the prime monetary advantages of SMEs advancement incorporate empowering
impeccable rivalry and reasonable circulation of riches. On the off chance that there are just vast
scale companies either, there will be a restraining infrastructure in an industry, with a solitary
providers, or oligopoly with just couple of providers, or monopolistic rivalry with just a few
providers, at that point the significant segment of national pay and riches will move inside the
hands of enormous industrialists. SME division, nonetheless, makes reasonable rivalry and fair
dissemination of riches. SMEs aid territorial and nearby advancement as they quicken
industrialization in country regions by connecting them with the more sorted out urban area and
help accomplish reasonable and fair appropriation of riches by provincial scattering of financial
exercises. (Javed Qureshi, 2011)
2.6.1. Definitions of SME

The term 'SME' envelops an expansive scope of definitions, which contrast as per factors, for
example, nation, geographic district, dimension of improvement and business culture. Indeed,
even inside nations, definitions may fluctuate or be nonexistent. Likewise, the definition itself is
frequently connected to national help programs and different controls, making the appropriation
of a solitary definition troublesome. Adding to the plenty of nation definitions for SMEs are
those made by global associations and nongovernmental associations (NGOs).
The explicit needs and condition of their venture portfolios regularly drive such definitions.
Different criteria used to characterize SMEs, for example, the quantity of specialists, resource
estimate, yearly deals, or yearly generation, etc. This most likely mirrors the firm size
24
conveyance of the locales in which the last organizations work, and hence the dimension of
monetary improvement. Three primary quantitative parameters are ordinarily utilized in the
SMEs definitions. (Elasrag, 2016)
Under the monetary definition a firm is viewed as little in the event that it meets the
accompanying three criteria:
1. it has a moderately little offer of their commercial center;

2. it is overseen by proprietors, or part proprietors, personalized and not through the
mechanism of a formalized administration structure; and
3. It is autonomous in that it isn't a piece of a bigger undertaking.
The ―statistical‖ definition, then again, is utilized in three principle regions:

1) measuring the span of the little firm part and its commitment to GDP, business and fares;
2) Contrasting the degree with which the little firm division's financial commitment has
changed after some time; and
3) In a crosscountry correlation of the little firms 'monetary commitment. (National Credit
Regulator, 2006)
2.6.2. Islamic Financing Techniques for SMEs

SMEs over the world, particularly in creating nations are confronting different difficulties, and
access to formal back is one of the primary hindrances that they confront. Access to back is a
worldwide test that should be tended to all the more altogether by different related bodies and
offices. The worldwide test can be met through inventive and various monetary item
contributions. As far as creative and different wellspring of financing for SMEs one probability
is to recognize the quality and capability of participatory back, for example, Islamic fund.
Different financial devices that Islamic fund can additionally take advantage of incorporate
zakat, waqf and qard al-hassan (kindhearted advance) nearby financial money related
instruments that are intended to give budgetary help to the poor, for example, Shariah-agreeable
little and medium undertakings (SMEs).
Regardless of how Islamic fund is marked, in view of the basic beliefs of advancing monetary
improvement through an arrangement of benefit based and value based financing arrangements,

25
an unmistakable financing hole for SMEs can be handled and served through Islamic managing
an account and nonbanking budgetary administrations. (El
2.6.3. Islamic Financing Options for SMEs

Islamic markets offer diverse instruments to fulfill suppliers and clients of assets in an
assortment of ways: deals, exchange financing, and venture. Fundamental instruments
incorporate expense in addition to financing (murabaha), benefit sharing (mudaraba) ,renting
(ijara), organization (musharaka) ,and for ward deal (sound' salam), Deferred-installment deal
(straight' mu'ajjal) and conceded conveyance deal (bay'salam) contracts, notwithstanding spot
deals, are utilized for leading credit deals. In a conceded installment deal, conveyance of the item
is gone up against the spot however conveyance of the installment is deferred for an agreedd
period. Installment can be made in a single amount or in portions, gave there is no additional
charge for the postponement. (Elasrag, 2016)
2.6.4. The Challenges of Financing SMEs

Monetary Problems: About 80% of Small and medium undertakings are quieted as a result of
poor financing and other related issues. The issue of financing SMEs isn't so much the
wellsprings of assets yet its openness. Variables distinguished repressing subsidizes openness are
the stringent conditions set by money related organizations, absence of satisfactory guarantee
and credit data and cost of getting to reserves. The capital deficiency issue in the little firm
division is mostly one, which stems for the uneconomic organization of accessible assets by the
proprietor directors. (Emeti, 2014)
Back is a useful region of business without which ventures couldn't endure. All business tasks
would stop if fund isn't sufficient to deal with it. SMEs confront numerous issues and back is one
of the real ones. SMEs couldn't anchor back because of lacking assurance to acquire credit from
money related foundations, poor attainability and absence of value commitment which upset the
stream of budgetary help to them. (Daneji, 2014)

26
As indicated by the (Elasrag, 2016) ponder, there are numerous snags confronting banks in the
financing of little and medium ventures.
 SMEs need administrative abilities to oversee organizations successfully. This prompts a
wasteful tasks structure, frail monetary revealing, and unviable activities (high
obligation). What's more, SMEs for the most part work in the casual division.
Consequently, banks are hesitant to loan to SMEs and see them as dangerous
speculations.
 Although as of now featured in a few investigations, it is as yet important noteworthy
variables that influence the supply of fund to the SME part. Components incorporate
SME-explicit issues (absence of a legitimate business structure), and additionally issues
looked by banks in adjusting the SME area (absence of ability to loan to SMEs). Issues
confining access to fund are interesting to every nation, except a few normal subjects
underline these issues.
 Most banks need capacities to loan to the SME area. This could incorporate deficient
procedures, absence of SME-explicit items (particularly Islamic items), untrained staff,
and lacking effort. The huge dangers included together with mind-boggling expenses of
exchanges/overhauling the SME client likewise deflect banks from focusing on the SME
division. Due to these institutional holes, banks will in general spotlight on developing
and medium-sized organizations and partnerships, which are more secure ventures than
SMEs, and banks as of now have the capacities to loan to these organizations adequately.
 Lack of data on SMEs is another issue looked by banks crosswise over nations. The
absence of an acknowledge department for satisfactory data on SMEs is a huge obstacle
averting banks from loaning to them. The issue introduces a noteworthy chance to build
up a thorough database on SMEs, which would plug data holes and lead to expanded
supply of fund to the SME division.
Islamic back, as an option and moral financing strategy, guides subsidizing to affect situated
genuine monetary exercises; it accordingly uses monetary and budgetary assets to fulfill the
material and social needs of all individuals from the network—including SMEs and imaginative
new businesses. The primary establishments of Islamic budgetary items are its advantage based
exchange nature, together with its value based nature of sharing danger and benefits. Every one
of these financing classes has a major task to carry out in expanding the monetary consideration
of SMEs and inventive new businesses, also pulling in potential capital from Islamic capital
suppliers and sources. (World Bank Group and Islamic Development Bank, 2015)
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CHAPTER THREE
RESEARCH METHODOLOGY
3.1. Introduction
This part is worried about the depiction of the chose technique of the exploration.
Strategy is the point by point methodology to be pursued to accomplish the examination goals.
The specialist explored or inspected how Islamic Banks practice contribute great execution and
advancements for Small and Medium-sized Enterprises SMEs in Mogadishu. The analyst
additionally arranged the exploration configuration, examine territory and populace, testing
structure and size, information sources, gathering strategies, and instruments, information
preparing, dissecting and introduction and the constraints of the examination.
3.2. Research Design

The specialist has picked quantitative technique for gathering information since it appears the
most proper and significant strategy to the investigation under thought. The exploration
configuration alludes to by and large arrangement or technique for directing the examination.
The analyst utilized contextual analysis as appropriate research structure since it will be utilized
in profound comprehension of the issue than summing up the discoveries over the populace.
3.3. Population and Sampling
3.3.1. Study Population

The objective of this paper is surveying the Islamic Banks practice on the improvements of
Small medium-sized undertakings in Mogadishu. The populace under the examination included
explicit 51 people chose from the populace. The objective populace contains of SMEs business
visionaries and bank authorities of the chose Banks.
3.3.2. Sample Design
Judgmental inspecting is a testing structure where the specialist picks components of the
populace that are mindful to the motivation behind examination and this causes the analyst to
decide the example measure since this examining configuration handles populace important to
the investigation and this gets respondents with specialized learning of the investigation.

28
3.3.3. Sampling Size
The example comprised of 45 examiners of shut end inquiries of target populace. This size has
been picked by arrangement of genuine arrangement of issues. The data was accumulated from
the chose respondents. In light of Slovin's Formula 45 test respondents were chosen from the
objective populace.
n=N/(1 +Ne2)
= 51/(1 + 51(0.052) = 45
Table 3.1 Structure of test estimate:
No SampleFrequencies
1 SMEs Entrepreneurs 15
2 Bank Officials 30
3 Total 45
Source: Primary Data
3.3.4. Sample Techniques
The example technique utilized is stratified example, this is on the grounds that distinguishes
subgroups in the populace and their extents and select from every subgroup to shape an example.
3.4. Data Collection Methods

The analyst utilized in the time of directing this examination both essential and optional as
examiners. The specialist frame amass discourse; the reason for existing is to acquire adjusted
data. The strategy utilized was just examiners.
3.4.1 Research Instruments
Poll technique is a standout amongst the most prevalent instruments for an information
accumulation in instructive research. This strategy gives us the quantitative information.
3.4.2 Research Procedures

The specialist gathered the required information through surveys by utilizing the exploration
instrument expressed prior.
3.4.3 Data Source

The scientist gathered this investigation through utilizing:
Essential Data: - The wellsprings of Primary information are surveys.
Optional information: - the wellsprings of auxiliary information are web, books, and so on.

29
3.5. Data Analysis
Expressive research was use in this exploration report so as to think about Islamic banks practice
on advancements of little and medium-sized ventures. The quantitative investigation was
completed. Information was gathered through shut finished surveys. In this manner, the analyst
made an understanding of the recurrence tables and in like manner made a synopsis of
discoveries, ends and proposals.
3.6. Ethical Consideration:

Each respondent were asked finished polls. Great clarification was done before filling it. Secrecy
was guaranteed and security kept up.
3.7. Anticipated Limitations of the Study

The Following are the real confinements that may keep the scientist from accomplishing the
most ideal consequence of this paper:
1. Lack of libraries.
2. Shortage of web get to or some other valuable innovation.
3. The specialist expected to be obliged with time for completing examination which may
prevent the analyst from doing research on a greater number of respondents.
4. The investigation is relied upon to be expensive as far as accounts for printing,
authoritative and transport moving to regions of study.
5. Little of data from some objective populace.

30
CHAPTER FOUR
DATA ANALYSIS AND FINDINGS
4.1. Introduction
This chapter presents the findings of the research as well as the interpretation and analysis of
both the primary and secondary data on Role of Islamic Banking Practice on the Development of
SMEs in Mogadishu. The study was carried out with the aim of providing answers to the
research questions using the methodology described in chapter three.
All 45 research participants responded to the entire survey questionnaire. The findings focus on
the following areas: Profile of respondents, to critically evaluate the financing problems and
challenges facing SMEs in Mogadishu, to review how Islamic Banking practices (contracts)
meet the needs of SMEs in Mogadishu, to investigate and analyze role of Islamic banking
principles in promoting SMEs in Mogadishu, to find out importance of Islamic banking
objectives on developments of SMEs in the City.
In the discussion process, it is obvious to differentiate the scale of the respondent agreement and
disagreement of different variables of the study in order to find out the highest frequency
agreement or disagreement in percentage manner as well as the lowest percentage frequency.
Also, there are tables and figures of statistical data analysis and results that will be used in the
discussion.

31
Table 3: How are you related with Islamic Finance?
Description Frequency Percent
Customer 15 33.3
Employee of Islamic Bank 30 66.7
Total 45 100.0
Source: primary data 2017
Findings show that 30 (66.7%) of the respondents are employee of Islamic Banks or Bank
Officials, while 15 (33.3%) of the respondents are Small Medium Enterprises Entrepreneurs
respectively. This shows that most of respondents Islamic bank officials.
Figure 3: How are you related with Islamic Finance?

35
4.3. Role of Islamic Banking Principles in Promoting SMEs in Mogadishu.
This section aspects findings of the role of Islamic Banking principle, respondents asked related
matters about the principles of Islamic Banking in promoting Small Medium Enterprises in
Mogadishu.
Table 6: Islamic Banking and Financial Services is Investing in business

where there is no Gharar (more risk).
Strongly agreed 15 33.3
Agreed 21 46.7
Not sure 3 6.7
Disagreed 6 13.3
Total 45 100.0
For first statement in table 4.2.1, Islamic Banking and Financial Services is Investing in business
where there is no Gharar (more risk)., approximately half 21 (46.7%) of respondents have agreed
the statement, while 15 (33.3%) strongly agreed and small number of responders 6 (13.3%)
disagreed, regard less to the disagreement of these small number of respondents another 6.7% of
the total population said not sure as shown in figure 4.2.1.
Therefore, most respondents 80% agreed that Islamic Banking and Financial Services is
Investing in business where there is no Gharar (more risk).
―©Daffodil international university‖

38
Table 4.2.4 The Prohibition of Riba (Usury or Interest, Whether Small or Large) is the
Most Important Principle of Islamic Finance.
Agreed 14 31.1
Not sure 6 13.3
Disagreed 3 6.7
Strongly disagreed 3 6.7
Total 45 100.0
As the above table and the following figure illustrate, 19(42.2%) of the repliers strongly agreed
that the prohibition of Riba is the most important principle of Islamic finance. 14(31.1%) of them
agreed with the same idea, while 6(13.3%) of them showed moderation, and 6(13.4%) of them
disagreed and strongly disagreed, Therefore, most respondents were agreedd (73.3%) that
prohibition of Riba is one of the important principles of Islamic finance.
Figure 4.2.4 the prohibition of Riba (usury or interest, whether small or large) is the most
important principle of Islamic finance.

42
Table 4.3.3 Islamic Banking achieves the objectives of Islamic finance by maximizing
profits and minimizing cost of operations.
Agreed 19 42.2
Not sure 3 6.7
Disagreed 6 13.3
Total 45 100.0
As regard for the statement in above table 4.2.3, that most of the respondents 42.2% (19) have
agreed that The Islamic Banking achieves the objectives of Islamic finance by maximizing
profits and minimizing cost of operations, 33.3% (15) of respondents said strongly agreed,
13.3% (6) said disagreed and 6.7% (3) said not Sure about the statement and finally 4.4% (2)
said strongly disagreed as shown in figure 4.3.3
The researched noticed from this point that a sum of 34 respondents which represents about
75.5% of the sample population have agreed with the statement.
Figure 4.3.3 Islamic Banking achieves the objectives of Islamic finance by maximizing
profits and minimizing cost of operations.

45
Table 4.3.4 Islamic Banking achieves the objectives of Islamic finance by promoting
sustainable development projects.
Agreed 20 44.4
Not sure 10 22.2
Disagreed 4 8.9
Total 45 100.0
As regard for the statement in above table 4.3.4, the researcher high pointed that most of the
respondents 44.4% (20) have agreed that Islamic Banking achieves the objectives of Islamic
finance by promoting sustainable development projects, 24.4% (11) of respondents said strongly
agreed, only 10 and 4 respondents said not sure about the statement and disagreed respectively.
Figure 4.3.4 Islamic Banking achieves the objectives of Islamic finance by promoting
sustainable development projects.

46
2.12 Islamic Banking Practices (Contracts)
This Section looks For the Relationship between Islamic banking contracts and needs of Small
Medium Enterprises, respondents were asked about their expertise and understanding of the
relationship the usage Islamic banking practices such as cash Murabahah, Mudarabah,
Musharakah and Bai‗Salam and the needs of SMEs.
Table 4.4.1 The Murabahah is one of the most popular contracts of sale used for
purchasing commodities and other products on credit.

Agreed 13 28.9
Not sure 2 4.4
Disagreed 2 4.4
Total 45 100.0
As the above table and the following figure illustrate, 62.2% of the repliers strongly agreed that
Murabahah is one of the most popular contracts of sale used for purchasing commodities and
other products on credit., 28.9% of them agreed with the same idea, while 4.4% of them showed
moderation, and 4.4 % of them disagreed. Therefore, most respondents were strongly agreed
(62.2%).

47
Table 4.4.2 The Mudaraba contract is a profit-sharing contract and it is used in trade
finance and in investment projects with short gestation periods.
Agreed 22 48.9
Not sure 7 15.6
Disagreed 1 2.2
Total 45 100.0
As the above table and the following figure illustrate, 48.9% of the repliers agreedd that
Mudaraba contract is a profit-sharing contract and it is used in trade finance and in investment
projects with short gestation periods, 26.7% of them strongly agreed and 15.6% of them showed
moderation (not sure), 2.2% and 6.7% disagreed and strongly disagreed. Therefore, most
respondents agreed (48.9%) as shown in figure 4.4.2
Figure 4.4.2 The Mudaraba contract is a profit-sharing contract and it is used in trade
finance and in investment projects with short gestation periods.

49
2.13 The Financing Problems and Challenges Facing SMEs in Mogadishu
This section looks for findings of the financing problems and challenges facing SMEs,
respondents were asked about their Experience of the related terms of the financing problems
and challenges facing.
Table 4.5. 1 Islamic financing encourage entrepreneurship as well as risk sharing between
the financier and the entrepreneur.
Agreed 15 33.3
Not sure 6 13.3
Disagreed 3 6.7
Total 45 100.0
The findings constituted that majority of the respondents have agreed and strongly agreed with
the statement in a number of 15 (33.3%) and 20 (44.4%) respectively, while small number
totaling 3 (6.7%) and 1(2.2%) disagreed and strongly disagreed respectively with the statement
as shown in figure 4.3.3, therefore most respondent strongly agreed
Figure 4.5. 1 Islamic financing encourage entrepreneurship as well as risk sharing

between the financier and the entrepreneur.

52
Table 4.5.2 Finance is a functional area of business without which enterprises could not
survive.
Agreed 20 44.4
Not sure 14 31.1
Disagreed 6 13.3
Total 45 100.0
The findings reveal that about approximately half of respondents 44.4% answered agreed while
11.1% more respondents strongly agreed leaving tiny number exactly 13.3% disagreed as shown
on figure 4.5.2, this shows that most of the respondents agreed
Figure 4.5.2 Finance is a functional area of business without which enterprises could not
survive.

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CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATIONS
5.1. Summary
In this section the researcher presented a summary of the findings for the Role of Islamic Banking
Practice on the Development of SMEs in Mogadishu. It is based on the results put forward in chapter
four. It highlights the objectives of the study and the findings of each objective.
5.1.1. The Profile Information of Respondents

The discoveries demonstrate that out of every one of the 45 respondents, male respondents
comprised 38(84.4%) of the populace and 7(15.6%) females. As to the age gatherings,
dominant part of respondents 28(62.2%) between 26-35 years of age and the second
position has a place with age bunch between under 26 years of age. This demonstrates
respondents fall inside various age sections from youth to senior citizens who have more
data in the field of study and can give an exceptionally helpful data to the investigation.
Discoveries demonstrate that 32 (71.1%) of the respondents are four year certification
holders, while 10 (22.2%) and 2 (4.4%) of the respondents are ace degree and PHD holders
individually. As indicated by the training dimension of respondents no less than two third
71.1% of the respondents are four year college education though the rest 33% 26.6%
establish Master qualification and PHD holders just 2.2% are auxiliary or proportionate
dimension. This implies all bank authorities and SMEs business people have achieved a
specific dimension training and learning. The examination uncovers that 17 (37.8%) of the
respondents have been working under Multi year, 22 (48.9%) between 2-5 years, 5
(11.1%) between 6-9 years and the rest 2.2% have been Working 5 years or more.
Discoveries demonstrate that 30 (66.7%) of the respondents are worker of Islamic Banks
or Bank Officials, while 15 (33.3%) of the respondents are Small Medium Enterprises
Entrepreneurs individually. This demonstrates the greater part of respondents Islamic bank
authorities.
Most of the respondents working background is at most five years, which demonstrates
that most respondents have sufficiently accomplished understanding. The Findings
demonstrate that 24 (53.3%) and 7(15.6%) of the respondents rete their dimension of in
general in the Islamic managing an account framework educated and entirely proficient by
55
any stretch of the imagination, while 11 (24.4%) and 3(6.7%) of the respondents have
constrained learning and no information at all separately. This implies greater part of the
respondents have information in the Islamic saving money framework.
5.1.2. Role of Islamic Banking Principles in Promoting SMEs in Mogadishu
 Regarding the issue the job of Islamic keeping money Principles in elevating to the
advancement of SMEs, the analyst distinguished Islamic Banking and Financial
Services is Investing in business where there is no Gharar, the investigation
demonstrates that greater part of the respondents which is 80% are either
unequivocally concurred (33.3%) or concurred (46.7%). This implies most of the
respondents imagined that Islamic Banking and Financial Services is Investing in
business where there is no Gharar.
 The contemplate likewise uncovered around 73.3% of the respondents either
unequivocally concurred (48.9%) or concurred (24.4%) that Islamic Banking and
Financial Services is for all intents and purposes not reveled in organizations like
betting, explicit, liquor, film and other prohibited organizations in Islam.
 The specialist discovered that greater part of the respondents 88.9% either
unequivocally concurred (46.7%) or concurred (42.2%) to acknowledge the
possibility that Islamic Banking and Financial Services is advancing Islamic
qualities and lifestyle towards staff, customers and overall population.
 The specialist uncovered that around respondents concurred or firmly concurred
(73.3%) the forbiddance of Riba (usury or intrigue, regardless of whether little or
expansive) is the most imperative rule of Islamic fund. This outcome reinforces that
most respondents despise premium based ideas that describe western banks.
5.1.3. The Importance of Objectives of Islamic Banking on Developments of

SMEs in Mogadishu
 The consider showed that all the more 50% of the respondents 13 (28.9%) firmly
concurred that Islamic Banking accomplishes the targets of Islamic back by reducing
neediness, furthermore, 24(53.3%) altogether Agreed with the announcement. As per
(Hafiz Iftikhar Ahmed, 2007) Social goals i.e. mitigation of neediness and expelling
social disparities.
56
Asset enhancement: Funding is given just to ventures that, in the bank's gauge, have the
most ideal return-for-hazard figures, notwithstanding meeting the paradigm of being
socially helpful. Tasks are chosen principally based on their foreseen gainfulness instead of
the financial soundness of the borrower.
 The analyst discovered with the examination that around 68.9% of the respondents were
either unequivocally concurred (28.9%) or concurred (40%) that Islamic Banking
accomplishes the goals of Islamic fund by contributing in expelling society's disparities,
enhancing general way of life and giving business openings.
 Also, the scientist found that around 75.5% of the respondents were either emphatically
concurred (33.3%) or concurred (33.3%). This outcome shows a positive sign as lion's
share of the respondents concurred that Islamic Banking accomplishes the targets of
Islamic fund by amplifying benefits and limiting expense of activities.
 The specialist uncovered that around (68.8%) respondents concurred or firmly concurred
that Islamic Banking accomplishes the destinations of Islamic back by advancing
practical improvement ventures. As Ajagbe T. S., 2013 demonstrates Islamic banks need
to work as per the shariah and they have distinctive targets to cultivate and enhance the
prosperity of an individual and the economy everywhere; among these destinations are to
advance speculation battles, endeavor and concerns which are they occupied with legal
business exercises, Investors getting their arrival from benefit and business sharing (PLS)
venture.
5.1.4. Islamic Banking Contracts and Needs of SMEs in Mogadishu

 The consider built up that about 91.1% of the respondents were either firmly concurred
(62.2%) or concurred (28.9%). This implies The Murabahah is a standout amongst the
most well-known contracts of offer utilized for acquiring items and different items on
layaway which is a positive sign. As demonstrated (Zamir Iqbal, 2011) the murabahah is
a standout amongst the most prevalent contracts of offer utilized for buying items and
different items using a credit card. The idea is that an agent buys an item — a ware, crude
material, etcetera for the benefit of a business person who does not have the money to do
as such. The agent and the business person concurred on a net revenue, regularly alluded
to as "stamp - up," which is included to the expense of the item. The installment is

57
deferred for a predefined timeframe, amid which the business person delivers the last
item and moves it in the market.
 The think about likewise shown that around 48.9% of the repliers concurred that The
Mudaraba contract is a benefit sharing contract and it is utilized in exchange back and in
speculation ventures with short development periods, While 26.7% of them firmly
concurred with a similar thought.
 The scientist uncovered that around (86.7%) of the respondents are either unequivocally
concurred (31.1%) or concurred (55.6%). Along these lines, larger part of the respondents
concurred that Musharakah is most suited for financing private or open organizations and
financing venture, just (4.4%) firmly differ the announcement.
 The scientist uncovered that Bai'Salam may be an ideal method for accepting financing
when contrasted with a credit with intrigue, since it didn't make an expansion in expense
as intrigue did and it spared them from the hardships and the hazard engaged with
advertising their create. 33.3% of the repliers concurred, 13.3% of them emphatically
concurred with a similar thought, while 42.2% of them addressed not certain, and 11.1%
of them oppose this idea.
5.1.5. The Financing Problems and Challenges Facing SMEs in Mogadishu
 Regarding the issue how the financing issues and difficulties confronting SMEs in
Mogadishu, the investigation shows that greater part of the respondents which is
77.7% are either unequivocally concurred (44.4%) or concurred (33.3%), (13.3%)
of the respondents not certain or moderate and (6.7%) oppose this idea. this implies
most of the respondents imagined that Islamic financing supports business
enterprise and additionally chance sharing between the agent and the business
person.
 The examine additionally uncovered around 55.5% of the respondents were either
emphatically concurred (11.1%) or concurred (44.4%) that Finance is an utilitarian
region of business without which undertakings couldn't endure, and (31.1%) of the
respondents not certain if the Finance is a practical region of business without
which endeavors couldn't endure and (13.3%) differ as demonstrates (Daneji, 2014)
Finance is an utilitarian zone of business without which ventures couldn't endure.

58
All business tasks would stop if back isn't sufficient to deal with it. SMEs confront
numerous issues and fund is one of the significant ones.
 The specialist discovered that lion's share of the respondents 68.9% acknowledge
that Lack of administrative capacities to oversee organizations viably prompts a
wasteful activities structure, powerless monetary revealing, and unviable tasks.
5.2. Conclusion
All in all every one of the respondents comprehend the job of Islamic keeping money practice on
SMEs advancement in Mogadishu. The zones that the investigation centered were Islamic saving
money rule, destinations, contracts in advancing SMEs in Mogadishu, And financing issues and
difficulties confronting Small and Medium-sized Enterprises (SMEs) in Mogadishu.
The examination uncovered that Principles of Islamic banks can add to the improvement of
SMEs and can totally supplant premium based exchanges that describe western banks, as
indicated by (Alsadek H. Walk, 2007) Islamic fund is very much arranged by Sharia, the
legitimate structure of Islam and its Quranic understanding, alongside the lessons of Sunna, This
system gives rules to individuals to pursue the standards of the Holy Quran and the Sunna in
their basic leadership in all attributes of life. Money related exchanges are one of the more
imperative dealings controlled by Sharia, apparently to guarantee the more fair dissemination of
salary and riches among Muslims in Islamic economies, and a portion of the basic standards
include: the forbiddance of Riba (premium), the denial of Gharar, and the prohibition of
financing and managing in wicked and socially flippant exercises and items, for example, betting
and the creation of liquor.
As to target of Islamic banks, the investigation underlined that the fundamental goal of Islamic
banks accomplishes by mitigating destitution, contributing in evacuating society's imbalances,
enhancing general way of life, giving business openings, boosting benefits, limiting expense of
activities and by advancing practical improvement ventures without disregarding Shari 'a law,
yet it denied that All Islamic banks destinations are relevant in advancing SMEs. Likewise, the
investigation set up that all Islamic managing an account targets completely couldn't help
contradicting western saving money destinations regarding financing

59
SMEs. As indicated by (Ajagbe T. S., 2013) Islamic banks (non – premium bank) need to work
as per the shariah and they have diverse goals to encourage and enhance the prosperity of an
individual and the economy everywhere, as to advance, cultivate and build up the utilization of
Islamic standards, law and custom to the exchange of budgetary and related business issues,
venture battles, undertaking and concerns which are they occupied with legitimate business
exercises, Investors getting their arrival from benefit and business sharing (PLS) speculation.
The investigation shows that Murabahah is a standout amongst the most prevalent contracts of
offer utilized for buying wares and different items on layaway and one of the strategies for
financing SMEs in Mogadishu and Musharakah is most suited for financing private or open
organizations and financing venture that contributes for creating and advancing Small Medium
Enterprises in Mogadishu. As indicated by (Ayub, 2007) From the perspective of the ranchers,
Bai'Salam may be an ideal method for accepting financing when contrasted with an advance with
premium, since first, it didn't make an expansion in expense as premium did and, second, it
spared them from the hardships and the hazard engaged with promoting their deliver. It isn't sure
whether the establishments of Bai'Salam achieved any adjustment in the job of delegates in the
country economy. It is, be that as it may, sure that it made ready for an immediate connection
between the producer and the broker in the city, who for the most part was the provider of assets.
At long last, concerning the issue of the financing issues and difficulties confronting SMEs in
Mogadishu, the examination uncovered that Finance is an utilitarian zone of business without
which ventures couldn't endure, Also Lack of administrative capacities to oversee organizations
adequately prompts a wasteful tasks structure, powerless monetary announcing, and unviable
activities.
As indicated by (Emeti, 2014) about 80% of Small and medium endeavors are quieted in view of
poor financing and other related issues. The issue of financing SMEs isn't so much the
wellsprings of assets however its availability. Components distinguished repressing finances
openness are the stringent conditions set by monetary organizations, absence of sufficient
security and credit data and cost of getting to reserves. The capital deficiency issue in the little
firm area is mostly one, which stems for the uneconomic arrangement of accessible assets by the
proprietor chiefs.

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5.3. Recommendations
Islamic banks work under the Shariah standards (Islamic Law) and that is the reason Islamic
managing an account is additionally valued by the Muslim nations. The fundamental explanation
for the valuation for Islamic keeping money is the preclusion of Interest in the budgetary
exchanges. Based on the discoveries that have been set up and end drawn from the examination,
the analyst thinks following proposals are required:
So as to upgrade the SME division, the money related and learning establishments should offer
classes and instructional classes in: how to compose a field-tested strategy; how to lead broad
investigation into the business field; government principles and directions. The discoveries
recommended that Islamic banks should treat SMEs contrastingly contrasted with huge
organizations and as per their necessities. In addition, they should fund start-up SMEs, and
should utilize Musharaka and Ijarah contracts in their managing SMEs.
Another recommendation of the examination worried that Islamic banks could utilize an okay
contract, for example, renting, they could likewise build up an autonomous establishment to go
about as an underwriter for SMEs looking for bank back; utilize takaful protection; The scientist
proposes Islamic banks in Mogadishu to utilize small scale fund as a fundamental device of
financing SME's. The discoveries likewise prescribe that Qard hassan to be a decent Islamic
strategy for fiscally supporting SMEs. The specialist suggests Increase financing of little and
medium ventures through Murabaha contract.
5.4. Suggestions for Future Research

There were numerous focuses, questions, and regions of premium that developed amid the
examination, which might be of enthusiasm for further research. These include:
It was discovered that Islamic banks felt that musharaka contracts were dangerous. To produce
more extravagant discoveries, an investigation of the impact of musharaka contracts in building
up the SME area in Mogadishu would be helpful.
Government bolster for the SME division is as yet missing to offering money, yet the
examination found that the administration could assume a critical job in supporting the SME
part. In this manner, the job of government foundations in supporting SMEs would be a
fascinating theme for further investigation and may conveniently improve the job of these
organizations.
61
Moreover, the discoveries of this investigation demonstrate that qard hassan are helpful
wellsprings of fund for SMEs. In this manner, leading an exploratory examination into the
impact of qard hassan on the development of SMEs

62
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Internship Report

©Daffodil International University

©Daffodil International University

Adam Ahmed Mohamed

©Daffodil International University

©Daffodil International University

©Daffodil International University

©Daffodil International University

LETTER OF AUTHORIZATION ................................................................................................. iii

LETTER OF ACCEPTANCE ....................................................................................................... iv

LIST OF TABLES ......................................................................................................................... xi

LIST OF FIGURES ...................................................................................................................... xii

1.1. Background ...................................................................................................................... 1

1.2. Statement of the Problem ................................................................................................. 5

1.3. Objectives of the Study .................................................................................................... 6

1.3.1. General Objective ......................................................................................................... 6

1.3.2. Specific Objectives ....................................................................................................... 6

1.4. Research Questions .......................................................................................................... 6

1.5. Scope of the Study............................................................................................................ 7

1.5.1. Content Scope ............................................................................................................... 7

1.5.2. Geographic Scope ......................................................................................................... 7

1.5.3. Time Scope ................................................................................................................... 7

1.6. Significance of the Study: ................................................................................................ 7

1.7. Conceptual Framework: ................................................................................................... 7

CHAPTER TWO ............................................................................................................................ 9

LITERATURE REVIEW ............................................................................................................ 9

2.1. The Modern and the Concept of Islamic Banking System............................................... 9

2.2. The Principles of Islamic Banks: ..................................................................................... 9

©Daffodil International University

2.2.2. The restriction of Gharar ................................................................................................ 11

2.3. Definition of Islamic Finance ......................................................................................... 13

2.3.1. Prohibition of Maysir (gambling and other games of chance) ................................... 13

2.3.2. Risk Sharing ............................................................................................................... 14

2.3.3. Justice and Equity Based ............................................................................................ 15

2.4. Islamic Banking Contracts ............................................................................................. 15

2.4.1. Barter Trading (Bay al-muqayada) ............................................................................. 16

2.4.2. General Sale (Bay' al-mutlaq)..................................................................................... 17

2.4.3. Exchange Sale (Bay' al-Sarf) ...................................................................................... 17

2.4.4. Mudarabah (Trustee Profit-Sharing) .......................................................................... 17

2.5. Objectives of Islamic Banking ....................................................................................... 22

2.6. Concept and Definition of Small and Medium-Sized Enterprises ................................. 24

2.6.1. Definitions of SME ..................................................................................................... 24

2.6.2. Islamic Financing Techniques for SMEs.................................................................... 25

2.6.3. Islamic Financing Options for SMEs ......................................................................... 26

2.6.4. The Challenges of Financing SMEs ........................................................................... 26

CHAPTER THREE ...................................................................................................................... 28

RESEARCH METHODOLOGY .............................................................................................. 28

3.1. Introduction .................................................................................................................... 28

3.2. Research Design ............................................................................................................. 28

3.3. Population and Sampling ............................................................................................... 28

3.3.1. Study Population......................................................................................................... 28

3.3.2. Sample Design ............................................................................................................ 28

3.3.3. Sampling Size ............................................................................................................. 29

©Daffodil International University

3.4. Data Collection Methods ................................................................................................ 29

3.4.1 Research Instruments .................................................................................................... 29

3.4.2 Research Procedures ..................................................................................................... 29

3.4.3 Data Source ................................................................................................................... 29

3.5. Data Analysis ................................................................................................................. 30

3.6. Ethical Consideration: .................................................................................................... 30

3.7. Anticipated Limitations of the Study ............................................................................. 30

CHAPTER FOUR ......................................................................................................................... 31